A Bank Guarantee (“BG”) is a common mode of securing payment of money in commercial dealing as the beneficiary, under the guarantee, is entitled to realize the whole of the amount under that guarantee in terms thereof, irrespective of any pending dispute between the person on whose behalf the guarantee was given and the beneficiary. Since the BG represents an independent contract between the bank and the beneficiary, both the parties are bound by the terms thereof. The invocation, thus, has to be in accordance with the terms of the guarantee, or else, the invocation itself would be bad in law.
Types of Bank Guarantees
The two types of BGs are: (i) Unconditional BGs; (ii) Conditional BGs. An Unconditional BGs ensure the payment to the beneficiary “unconditionally and irrevocably” on beneficiary’s first demand upon invoking the guarantee. The Conditional BG has certain conditions which once fulfilled, the Conditional BG can be invoked by the beneficiary. One has to pay attention to language of the guarantee so as to determine which kind of guarantee is it. Some guarantees though mention the words “unconditionally and irrevocably,” they qualify such expressions with a condition or a situation upon occurring of which the underlying guarantee becomes encashable. In such circumstance, the BG in question would be categorized as a Conditional BG. Therefore, the terms of guarantee are extremely material.
Invocation of Bank Guarantees
The beneficiary needs to invoke the BG on or before the expiry date of the guarantee. If the Bank does not receive any claim on or before the validity period mentioned, the Bank is discharged from its liability. The beneficiary needs to send a letter to the Bank stating the circumstances that arose leading to the encashment of the guarantee. However, how can the party on whose behalf the guarantee was drawn injunct the beneficiary from encashing the guarantee? For this very purpose, there have been a catena of judgments which are briefly discussed herein below.
Injunction on invocation of Unconditional Bank Guarantee
Usually a plain reading of the provisions of a standard unconditional bank guarantee reflects that the guarantor undertakes to pay without demur which makes the demand conclusive and binding. Some bank guarantees make the beneficiary a sole judge in regard to invocation and enforcement of bank guarantee, which leaves the decision of invocation to the absolute discretion of that beneficiary. The guarantor must pay without having any regards to the dispute pertaining to the main contract and the court would be precluded from embarking on an enquiry pertaining to the prima facie nature of the respective claim of litigating parties relating to the main dispute.
In U.P. Co-op. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., the obligation was undertaken by the Bank to repay the amount on “first demand” and “without contestation, demur or protest and without reference to such party and without questioning the legal relationship between the party in whose favour guarantee was given and the party on whose behalf guarantee was given.” The Hon’ble Supreme Court held that the Bank was obligated to pay the moment a demand was made without protest and contestation, irrespective of any dispute between the parties. The Hon’ble Court further held that in such a case, the party on whose behalf the guarantee was given was not entitled to an injunction restraining the bank in performance of its guarantee.
A New York Supreme Court case was referred to in U.P. Co-op. Federation Ltd. (Supra), wherein an act that constituted as fraud was dealt with. In the matter of Sztejn v. J. Henry Schroder Banking Corp, which was a case wherein the facts were as follows:
the Claimant’s action before the New York Supreme Court was to restrain the payment or presentment for payment of drafts under a letter of credit issued to secure the purchase price of Hob Bristles bought by the Claimant from the beneficiary of the credit;
the beneficiary shipped some material and presented drafts and other related documents for payment by the issuing bank;
the Claimant alleged that the material shipped was not Hog Bristles but cow hair and other worthless material, rubbish. Although the documents tendered appeared to conform to the credit, they contained material false representations of facts;
the defendant bank had brought a Motion to Dismiss the Complaint on the ground that the facts did not constitute a cause of action (for the purposes of the motion, the allegations in the complaint were deemed to be established).
The New York Supreme Court held that there was a fraud (pertaining to the documents tendered for invocation) which disclosed a cause of action which entitled the party to an injunction to stop payment. This was, therefore, a case where the beneficiary knew and believed he had shipped rubbish/ worthless material but nevertheless made a false representation to the bank that he was entitled to payment for hog bristles.
In light of such stringent law, there are only two narrow exceptions where injunction on invocation of unconditional bank guarantee can be granted viz:
Fraud of an egregious nature as to vitiate the entire underlying transaction, of which the bank has notice, and
Special equities in the form of preventing irretrievable injustice between the parties.
While referring to the definition of “Fraud” as provided under Section 17 of the Contract Act, 1872, the Supreme Court in Reliance Salt Ltd. v. Cosmos Enterprises, held that commission of fraud would include any act committed by a party to deceive another party or his agent or to induce him to enter into a contract. And the burden of proving such fraud lies upon the party making such allegation.
Nature of Fraud – In the matter of U.P. State Sugar Corporation v. Sumac International Ltd., the Hon’ble Supreme Court held that a fraud in connection with an unconditional bank guarantee be such that “it vitiates the very foundation of such a bank guarantee.” [Emphasis added.] No other fraud is good enough to meet the test, and moreover, the Bank needs to have notice of such fraud. The Hon’ble Supreme Court held that since the bank pledges its own credit involving its reputation, it had no defense for declining the payment except in case of fraud. The Supreme Court further held that the nature of fraud should be of an “egregious nature as to vitiate the entire underlying transaction. Further, such fraud must be committed by the beneficiary, and not by somebody else.
Even in the matter of Hindustan Steelworks Construction Ltd. v. Tarapore & Co., while referring to the judgment in U.P. Co-op. Federation Ltd. (Supra), the Hon’ble Supreme Court held that the exception of fraud needs to have the effect of vitiating the entire underlying transaction. The Supreme Court further held that the fraud, whether at the time of execution of the contract or on account of circumstances or events subsequent thereto, the fraud must be of an egregious nature so as to vitiate the entire underlying transaction or such that would vitiate the very foundation of such a bank guarantee.
Special equities - irretrievable injustice
The second exception relates to the cases where in allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. The harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature that it would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country would be severe.
Injunction on invocation of Conditional Bank Guarantee
If bank guarantee is conditional, the beneficiary cannot have unfettered right to invoke the guarantee and the court can issue an injunction against invocation of the guarantee in view of the facts of the case. Where a bank guarantee is a conditional one, the invocation thereof would have to be in strict conformity with the conditions on which the guarantee is issued.
In the matter of Hindustan Construction Co. Ltd. v. State of Bihar and Ors., the bank guarantee in question had used the expression “agree unconditionally and irrevocably” to guarantee payment to the beneficiary on his first demand without any right of objection. But the said expression was immediately qualified by a condition which referred to the original contract between the parties. The condition stipulated that if certain obligations under the contract are not fulfilled by the party on whose behalf the BG was issued, then a right would accrue to the beneficiary to claim recovery of the whole or part of the guarantee amount.
The Hon’ble Supreme Court in the aforesaid matter held that in case of conditional guarantee, the beneficiary could not be said “to have an unfettered right to invoke that guarantee and demand immediate payment thereof.” It further held that the condition stated in the bank guarantee needs to be fulfilled in order for the beneficiary to invoke the conditional bank guarantee. The Supreme Court then reversed the judgment and order passed by the Division Bench of the Hon’ble Bombay High Court to the extent where it is vacated the injunction order granted by the Ld. Single Judge in respect of the conditional bank guarantee.
The different set of parameters for granting injunction to invocation of a conditional bank guarantee and an unconditional bank guarantee, as set out by the judiciary, is apparent from the above review of various judgments. Barring the exceptions in case of the unconditional BGs and barring the non -fulfillment of conditions in case of the conditional BGs, the Banks are obligated to honour the demand for guaranteed amount made by the beneficiary. Because the opposite would cause irreparable damage to the trust in commerce and would deprive vital oxygen to the money supply which is necessary for the economic growth.
In light of the aforesaid discussion, a question arises as to what sort of averments need to be present in the petition seeking injunction. Here are our pointers:
For an unconditional bank guarantee
The contentions of Fraud or the need for special equities are required to be specifically pleaded and proved.
Mere assertion or allegation or conjecture of fraud, without any evidence, would not be sufficient. All the necessary and clear evidence in the proof of fraud must be necessarily pleaded and produced.
The facts of the case should depict that fraud committed by the beneficiary is of such nature that it destroys the entire underlying transaction.
There should be a serious dispute involved and a prima facie case of fraud. A case has to be made out that there is a need for grant of special equities in the form of injunction to prevent irretrievable injustice to the parties involved.
It is necessary that at the time of the invocation of the BG, the Bank should have the notice of the fraud. Moreover, such fact of notice along with its evidence has to be averred in the petition.
For conditional bank guarantee
The facts and circumstances where the conditions as stated or referred to in the conditional bank guarantee have not been fulfilled, must be pleaded in the petition seeking an injunction.
Sufficient evidence with regards to such unfulfilled conditions must be pleaded and produced.
A case highlighting the prejudice which would be caused if the payment under BG is permitted must be made out.
 Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Co-op. Ltd., (2007) 6 SCC 470.
 M/s. S. Satyanarayana & Co. v. M/s. West Quay Multiport (Private Limited), 2015 SCC OnLine Bom 3352.
 Consortium of Deepak Cable India Pvt. Ltd. v. Teestavalley Power Transmission Ltd. 2014 SCC OnLine Del 4741.
 (1998) 1 SCC 174; Also see: Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. (1997) 6 SCC 450; M/s. ABG Ports Limited v. M/s. PSA International Pte Limited (Appeal (L) No. 727 of 2012, Bombay High Court, judgement dated 21st November, 2012).
 (2006) 13 SCC 599
 (1997) 1 SCC 568; Also see: Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. (1997) 6 SCC 450
 Also see General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd., (1991) 4 SCC 230
 (1996) 5 SCC 34
 U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568.
 (1999) 8 SCC 436; followed by Jacsons Veeners & Panels Pvt. Ltd. v. State Bank of Travancore & Anr., 2009 SCC OnLine Ker 4210.